Investing Basics

Dr. Jean Lown & Erica Abbott

FCHD Dept., USUInformation credit to:Dr. Barbara O'Neill

Rutgers Cooperative Extension

Welcome to FPW

• Please ask questions or ask for clarification as we go along.

• To access internet Log in to Bluezone: https://bluezone.usu.edu/– guest

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Overview

• Getting ready to invest• Basic building blocks:

– mutual funds• Holding stocks & bonds

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Why Invest?

• To achieve financial goals… – vehicle purchase/replacement– down payment on a home– a child’s education– What are YOUR $ goals?

• To build wealth for financial security• For retirement

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Things To Do Before Investing

• Pay off credit card debt!– No investment pays as much as credit

card interest• Build an emergency fund• Need help? Use the FPW Blog

– http://fpwusu.blogspot.com/

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Determine your Risk Tolerance

• How much risk can you stand?• Risk tolerance quiz:

– http://njaes.rutgers.edu/money/riskquiz/– Lots of online quizzes

• What is your time horizon to achieve your investment goal?– More risk with long term goals– Less risk with short term goals

What did you do in 2008-09?

• If you had investments during 2008-2009 global financial market meltdown…– What did you do?

• Buy? Sell? Hold? Rebalance?

• Research shows risk quizzes are not very reliable

Relationship Between Risk and Return

Risk HighLow

Expected Return

High

Low

CashEquivalents

Bonds

Int’l Bonds

Real Estate

Stocks

Int’l Stocks

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When to Start Investing

• Is your budget balanced?• Do you save every month?• Do you pay credit cards in full every

month?• Do you carry adequate insurance to

protect against major catastrophes?– Earthquake insurance on home– Health, disability & life insurance

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Pick Investments to match goals, time line, & risk tolerance

• Are goals short- or long-term?– If your time horizon is <3 years you

should be saving instead of investing.– Saving: no risk of loss of principal– Investing: take some risk to beat

inflation & see $ grow

How to find money to invest

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Where to find $ to Invest?

• “The only thing that works is saving first and then living with what’s left.”– Richard Thaler, Nobel Prize winner

in economics, University of Chicago• Track your spending• Use a written spending plan

– Savers who use a plan have twice as much $ as those who don’t!

Bought gas lately?

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Investing Terminology

• Stock – ownership in a company• Bond – loan money to bond issuer

(corporate or state/municipal)• Mutual Fund – A diversified portfolio

of stocks &/or bonds (or other investments)

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More Terminology

• Interest – price paid for use of borrowed money

• Rent – payment received for use of real estate

• Dividend – a portion of a company’s earnings paid to stockholders

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& more Terminology

• Capital Gain (loss)–increase (decrease) in value of investment – occurs only when you actually sell

• Rate of Return (or Yield) –total return on investment expressed as a % of price

Establish Your Long-Term Investment Strategy

• Strategy 1: Buy and hold anticipates long-term economic growth– ignore short term volatility– Turn of CNN

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Long-Term Investment Strategy 2

• Dollar-cost averaging buys at “below-average” costs– Invest same amount every month– Ignore market fluctuations– Set up automatic deposit– Buy fewer shares when price is high

& more shares when price is low– Average price of your shares is <

average cost

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Long-Term Investment Strategies 3 & 4

• Portfolio diversification reduces volatility

• Would you like pumpkin, apple, or mince pie?

• I’ll have some of each!

• Asset allocation • % to desired investment categories– Rebalance yearly to desired %

• Ex. 60% stocks/40% bonds22

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What type of Investments?

• Do you want to lend your money or own an asset? (or both)– Bonds: Debts – lending investments

• Fixed Maturity – borrower agrees to repay the principal on a specific date

• Fixed Income – borrower pays investor a specific rate of return

• Can lose $ if lender defaults (i.e. Detroit bonds)

– Stocks (equities) – ownership investments• Value varies; can lose $• No guarantees

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Investing Made Easy

• Automatic Investing– Contribute to retirement plan at work

or– Automatic transfer from checking to:

• Individual Retirement Account• Mutual fund• 529 college savings• Other investment

Mutual Funds• Advantages

– Professional management

– Reduced risk through portfolio diversification • Own small part of lots of different investments

– Monitoring investment is easy

• Disadvantages– Funds follow market performance (down

as well as up)

– No guaranteed rate of return (same as any investment)

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Successful Investing• Educate yourself • Determine your risk tolerance• Decide on asset allocation• Contribute regularly• Monitor investment performance• If you need help, consult an

adviser – (N.B. most “advisers” are

salespeople)

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More Successful Strategies

• Ask questions about…– Expenses – Historical performance: 3, 5, 10 yrs

• Past performance is no guarantee of future returns

– Investment goal (e.g., capital appreciation)

• “Rule of Three” – Compare at least 3 investments

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Low-Maintenance Strategies

• Target maturity date mutual funds for retirement

• Index funds

• Automatic deposits

• Annual financial check-up

– Rebalance to chosen asset allocation

– Some MFs do this automatically for you

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Investing Resources

• “Investing for Your Future” – home study course http

://www.extension.org/pages/10984/investing-for-your-future

• Money Essentials: Starting to Invest:– http://

money.cnn.com/pf/money-essentials/index.html

• Money & Kiplinger magazines & websites

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Learn About Mutual Funds

• http://squaredaway.bc.edu/learn-more/mutual-funds

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How to Win the Loser’s Game

https://www.youtube.com/watch?v=SwkjqGd8NC4

• “to provide ordinary investors with the information they need - and to challenge the industry to offer consumers a fairer deal.”

• 80 minutes; 10 segments• interviews “some of the biggest

names and brightest minds in the investment world.”

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Financial Planning for Womenwww.usu.edu/fpw

• Blog: http://fpwusu.blogspot.com/• http

://www.facebook.com/FinancialPlanningforWomen

• October 14: Diversification & Asset allocation

• November 11: Women are better investors than men!

Sign Attendance for Drawing

Each time you attend FPW in fall entered into drawing.– free financial consultation with Dr. Jean

Lown• Recent winners: Carol Kochan & Star

Coulbrooke

– personal finance books

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Questions? Comments? Experiences?